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CFP Strategic Memo, November 19, 2001

Center for Freedom and Prosperity Strategic Memorandum

Date:  November 19, 2001

To:      Supporters of Tax Competition

From:  Dan Mitchell, Heritage Foundation Senior Fellow

Re:      OECD's "Progress Report"

 The Organization for Economic Cooperation and Development has released its so-called Progress Report. As we say in America, the OECD has "egg on its face." It has been forced to once again delay its deadline (does anyone care anymore?). The Paris-based bureaucracy also has been forced to scale back its demands much to the chagrin of hard line fiscal imperialists like France.

But has the battle been won? The answer is no. High-tax governments have not given up in their efforts to tax income earned in low-income jurisdictions. To be sure, the OECD looks increasingly impotent, but this is not a reason to relax. It is now increasingly apparent that the OECD initiative is merely a "foot in the door" that will pave the way for the European Union's mandatory and automatic "information exchange" scheme. Indeed, the OECD even acknowledges that its effort complements the work of the EU.

 This means that it is more important then ever for leaders in low-tax nations to resist the OECD and for supporters of market liberalism in high-tax nations to condemn extra-territorial taxation. The notion that "it now is okay to acquiesce to the OECD because the initiative has been emasculated" is very misguided. Jurisdictions would be making a big mistake if they capitulate, thinking they can safely ignore the vast majority of future requests for information.

 Simply stated, if the OECD succeeds, that will create enormous momentum for the EU's Savings Tax Directive. But if the OECD does not succeed especially if jurisdictions that already have committed engage in passive resistance, then the EU initiative has almost no chance. More specifically:

  • The OECD proposal is the "camel's nose under the tent." Our friends in various finance ministries (and even inside the OECD and EU) have urged us to continue our efforts against the OECD. Not because they think the OECD poses a threat. The Paris-based bureaucracy has severely damaged its reputation because of its anti-competition initiative. Instead, they urge continued resistance because this is the best way to derail the EU's Savings Tax Directive. That scheme, which is based on automatic and mandatory "information exchange," is far more dangerous than the increasingly toothless OECD proposal. And it is a foregone conclusion that any jurisdiction that acquiesces to the OECD scheme will face enormous pressure to surrender all fiscal sovereignty to the EU.
  • America vs. Europe, Part I: The United States is squabbling with Europe's welfare states, and this is good news. Many European governments including Tony Blair's two-faced regime (against tax harmonization when the public is paying attention, but for harmonization when nobody is watching) are upset that the U.S. has put an end to the OECD's "ring-fencing" criterion and emasculated the "information exchange" criterion. The U.K. government actually announced that it still views "ring-fencing" as a criterion and supports the imposition of financial protectionism on that basis. Another ongoing battle is the WTO fight between the U.S. and the EU over America's tax treatment of "foreign sales corporations." This conflict is becoming increasingly bitter, which is good news since it will make the U.S. Treasury folks less likely to acquiesce to further EU tax harmonization schemes. This is very important since the EU Savings Tax Directive is contingent on U.S. participation (as well as participation from Switzerland and all UK territories).
  • America vs. Europe, Part II: Policy conflicts between the United States and high-tax nations in Europe should be expected. The United States is a low-tax jurisdiction, the United States is a tax haven, and the United States is the world's biggest beneficiary of international tax competition. The overall tax burden in the U.S. is 29 percent of GDP, compared to 43 percent of GDP in the European Union. This enormous advantage helps explain why living standards in the U.S. are 50 percent higher than EU levels, why economic growth has been so much stronger in America over the past two decades, and why unemployment rates are so much lower in the United States. A paper to be released by the Center for Freedom and Prosperity explains why tax harmonization is a threat to America's competitive advantage (for a pre-release copy of the paper please contact CFP). Armed with this new information, we can expect even greater resistance from American policy makers to the OECD and EU. As such, why should any other jurisdiction capitulate?

There are many reasons to be optimistic. The OECD initiative no longer is a meaningful threat, and the EU initiative will collapse so long as either America or Switzerland holds firm. Fortunately, U.S. officials increasingly recognize that there is no reason for America to side with Europe's welfare states. So long as low-tax jurisdictions do not give the OECD a boost by needlessly capitulating, the future looks bright.


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